Between the thin trading volume and the holidays there wasn't a lot of opportunity in the Forex markets this week.
In any case, I did manage to eek out a 7.5% gain in net asset value.
This has me thinking. If I was to build up an account balance of approximately $20,000 and maintain gains of 5% or more per week then I'd probably be able to think about quitting my day job.
This task seems doable.
However, at the same time, I have no plans to quit my day job. First, I rather like my current job. Second, it's a lot easier to build up a stake while you are gainfully employed and not relying on profitable trading. I'm pretty sure the added pressure would ratchet up the psychological intensity.
الاثنين، 2 فبراير 2009
Extraction Strategies
Extraction strategies? What the heck is that?
Underwater Psychology
If you are like anyone else you've found yourself in a trade that is going against you from time to time. You start to imagine reasons why the price could continue to move against you.
For example, this morning I was underwater in a position due to the spike in AUDJPY. The price of oil was rising due to the conflict in Gaza, apparently. At the same time, due to the recent break of a long term resistance line I'd expect a long term upward trend. Oh, not to mention that in thin markets I'm unsure how prices will react to these issues.
On my side was the fact that the 5m, 15m, 1hr and 3hr were all pinned at the top of their respective stochastic indicators.
First, keep your cool. If you are entering with reasonably sized positions you shouldn't be facing an emergency even if you expect the market is in a long term trend against you. If you aren't in a panic then look for the ability to work your way back out of your trades...
All At Once
This strategy is fairly ballsy, but when it works it feels really good. Look for indications that the upward spike is coming to an end. Perhaps a double top, long term indecision, stalling at a resistance level, or some other good probability situation. At this point you can acquire another position. You may find this happens more than once before you get an eventual correction. Each time you dip your toe in draw a new horizontal trend line at your current break even point. Pop out when you have a small profit and get your bearings.
Salami Method
While this strategy is less risky, it can be easier to perform once the market establishes a new consolidation zone. As you approach a high in what seems to be the new consolidation zone, acquire another position. As you eek out a bit of profit close your profitable entry, protecting that profit from a market reversal, and then close off a small portion of your losing trades. Over time you should be able to use many small profits to reduce open positions and square your account.
Who Gets Underwater?
Look, though all the get-rich-quick kiddies in the online forums are trying to scalp their way to riches, this is not how everyone trades. These people use positions that are quite large with respect to their NAV and they are not able to maintain positions during periods of loss. With small trades, patience, and an ability to know whether or not it's time to throw in the towel you can survive being underwater quite handily.
The Big Picture
I like to think of the markets being "rational" or "irrational". When the markets are irrational, they are not adhering to your technical analysis. Whether fundamentals, news, or other issues are taking precedence does not matter. What matters is that you look for periods of rationality to make your trades. If the markets become irrational while you are in the pool, don't panic. Unless things are truly horrific, try to wait until the 1hr or 3hr stochastic indicators have gone your way.
This is how I was able to get out of some underwater trades just this morning. With all the stochastics pinned against me, I opened a position at an apparent top. The AUDJPY then dropped like a rock, below my new break even point, and I closed my positions for a small profit.
I don't care if I missed some upside on a continued drop. I believe the market will continue to move upward in the long term -- so I don't want to hold on to short positions for long term gain.
Hmm, another thought. If you are a beginner and aren't able to generate a high percentage of winning trades, these strategies probably are not for you. You have to be able to create winners or else entering more positions will simply sink you further into distress.
Underwater Psychology
If you are like anyone else you've found yourself in a trade that is going against you from time to time. You start to imagine reasons why the price could continue to move against you.
For example, this morning I was underwater in a position due to the spike in AUDJPY. The price of oil was rising due to the conflict in Gaza, apparently. At the same time, due to the recent break of a long term resistance line I'd expect a long term upward trend. Oh, not to mention that in thin markets I'm unsure how prices will react to these issues.
On my side was the fact that the 5m, 15m, 1hr and 3hr were all pinned at the top of their respective stochastic indicators.
First, keep your cool. If you are entering with reasonably sized positions you shouldn't be facing an emergency even if you expect the market is in a long term trend against you. If you aren't in a panic then look for the ability to work your way back out of your trades...
All At Once
This strategy is fairly ballsy, but when it works it feels really good. Look for indications that the upward spike is coming to an end. Perhaps a double top, long term indecision, stalling at a resistance level, or some other good probability situation. At this point you can acquire another position. You may find this happens more than once before you get an eventual correction. Each time you dip your toe in draw a new horizontal trend line at your current break even point. Pop out when you have a small profit and get your bearings.
Salami Method
While this strategy is less risky, it can be easier to perform once the market establishes a new consolidation zone. As you approach a high in what seems to be the new consolidation zone, acquire another position. As you eek out a bit of profit close your profitable entry, protecting that profit from a market reversal, and then close off a small portion of your losing trades. Over time you should be able to use many small profits to reduce open positions and square your account.
Who Gets Underwater?
Look, though all the get-rich-quick kiddies in the online forums are trying to scalp their way to riches, this is not how everyone trades. These people use positions that are quite large with respect to their NAV and they are not able to maintain positions during periods of loss. With small trades, patience, and an ability to know whether or not it's time to throw in the towel you can survive being underwater quite handily.
The Big Picture
I like to think of the markets being "rational" or "irrational". When the markets are irrational, they are not adhering to your technical analysis. Whether fundamentals, news, or other issues are taking precedence does not matter. What matters is that you look for periods of rationality to make your trades. If the markets become irrational while you are in the pool, don't panic. Unless things are truly horrific, try to wait until the 1hr or 3hr stochastic indicators have gone your way.
This is how I was able to get out of some underwater trades just this morning. With all the stochastics pinned against me, I opened a position at an apparent top. The AUDJPY then dropped like a rock, below my new break even point, and I closed my positions for a small profit.
I don't care if I missed some upside on a continued drop. I believe the market will continue to move upward in the long term -- so I don't want to hold on to short positions for long term gain.
Hmm, another thought. If you are a beginner and aren't able to generate a high percentage of winning trades, these strategies probably are not for you. You have to be able to create winners or else entering more positions will simply sink you further into distress.
As I Get Better
I probably shouldn't be trading during this period. I know there is thin volume, that moves may not reflect wider market sentiment, and whatever else I should know. However, I simply like to trade. Besides, now that I'm getting better, it's a hobby that can generate an income.
One thing I've noticed though is that I'm still too impatient. Basically, my worst batting average will coincide with my first trades. I simply don't wait for a good enough entry point when my account has been squared. This doesn't stop me from earning revenue or anything like that, but it certainly does limit my ability to do so as I have to be cautious about how much risk I put on the table at any one time.
Because this first trade is most likely to end up under water I am often in a position where I have to extract myself from this trade. For example, over the last few days the market has been range bound. I don't feel any particular rush to liquidate my ill-timed position, but it would be nice not to have it hanging over my activities.
So, as we approach what appears to be the top of our range I will sell a profitable position and then liquidate a portion of my ill-fated trade. Perhaps the ratio will be something like 5:1 in terms of profit versus loss. This means that I'd earn $5 on my winning position and accept $1 of loss on my losing position.
As long as what is over your head is not a huge position relative to your willingness to accept risk, then you can just whittle away at it. Once again, as I discussed in my last post on "extractions", you have to keep calm about things and be comfortable in the knowledge that you have a nice win/loss ratio to take advantage of. Besides, as long as the risk level is kept low, you might just find that the position becomes profitable again before you've gotten rid of it.
One thing I've noticed though is that I'm still too impatient. Basically, my worst batting average will coincide with my first trades. I simply don't wait for a good enough entry point when my account has been squared. This doesn't stop me from earning revenue or anything like that, but it certainly does limit my ability to do so as I have to be cautious about how much risk I put on the table at any one time.
Because this first trade is most likely to end up under water I am often in a position where I have to extract myself from this trade. For example, over the last few days the market has been range bound. I don't feel any particular rush to liquidate my ill-timed position, but it would be nice not to have it hanging over my activities.
So, as we approach what appears to be the top of our range I will sell a profitable position and then liquidate a portion of my ill-fated trade. Perhaps the ratio will be something like 5:1 in terms of profit versus loss. This means that I'd earn $5 on my winning position and accept $1 of loss on my losing position.
As long as what is over your head is not a huge position relative to your willingness to accept risk, then you can just whittle away at it. Once again, as I discussed in my last post on "extractions", you have to keep calm about things and be comfortable in the knowledge that you have a nice win/loss ratio to take advantage of. Besides, as long as the risk level is kept low, you might just find that the position becomes profitable again before you've gotten rid of it.
Trading A Longer Timeframe
FOREX Rethink
Though I've been trading the AUDJPY on a 15m chart quite a bit, and with reasonable success, I am thinking about moving to a larger time frame. Well, to be accurate, it's not so much that I plan to use a different chart. What I really want to do is accumulate positions over a longer period of time.
Do you know why?
Because, if I can accumulate a bunch of positions that are at some level of profit, I can make incredible gains during a longer term market move. For example, if you have an appropriate part of your account at risk, plus you have multiple in-profit positions protected by a stop loss, all of them will bring returns during an extended upswing.
Accumulation Strategy
To accumulate in-profit positions I have my charting software chart my average position price. When prices are above this level I'll sell a profitable position that was purchased above the current average price. Then, when the market moves south, I'll buy a new position further down.
It's important to use small enough positions when using this strategy as you may end up accumulating some trades while waiting for a suitable price swing. Using small position sizes gives you the flexibility to open and close positions, some of which may be unprotected, while you wait for a major move in your favor.
I find this type of trading improves my patience. You will end up thinking it may be worthwhile making another trade and then say, I'll wait for it to hit point X instead. Either the price will hit X or it must move in my favor! With this viewpoint it is very easy to wait and see what happens. Doing this, and catching a new low price point, for example, adjusts your average price and makes it easier to find a suitable position to unload on an upswing.
Accumulation Results
Based on my own experience I can suggest that your interim results will be reduced. You won't be entering and exiting trades as often nor will you be as concerned about capturing apparent tops and bottoms. However, once you find yourself on the right side of a longer term swing you can pull in significant profits all at once.
However, keep in mind, you are at risk of a major movement against your trades. You must be willing to trust a significant top or bottom -- to the point that if it fails you could end up suffering a margin call. This isn't for the faint of heart. Of course, you could always create a small sub-account specifically for implementing this type of strategy when you think you do have a known top or bottom.
Though I've been trading the AUDJPY on a 15m chart quite a bit, and with reasonable success, I am thinking about moving to a larger time frame. Well, to be accurate, it's not so much that I plan to use a different chart. What I really want to do is accumulate positions over a longer period of time.
Do you know why?
Because, if I can accumulate a bunch of positions that are at some level of profit, I can make incredible gains during a longer term market move. For example, if you have an appropriate part of your account at risk, plus you have multiple in-profit positions protected by a stop loss, all of them will bring returns during an extended upswing.
Accumulation Strategy
To accumulate in-profit positions I have my charting software chart my average position price. When prices are above this level I'll sell a profitable position that was purchased above the current average price. Then, when the market moves south, I'll buy a new position further down.
It's important to use small enough positions when using this strategy as you may end up accumulating some trades while waiting for a suitable price swing. Using small position sizes gives you the flexibility to open and close positions, some of which may be unprotected, while you wait for a major move in your favor.
I find this type of trading improves my patience. You will end up thinking it may be worthwhile making another trade and then say, I'll wait for it to hit point X instead. Either the price will hit X or it must move in my favor! With this viewpoint it is very easy to wait and see what happens. Doing this, and catching a new low price point, for example, adjusts your average price and makes it easier to find a suitable position to unload on an upswing.
Accumulation Results
Based on my own experience I can suggest that your interim results will be reduced. You won't be entering and exiting trades as often nor will you be as concerned about capturing apparent tops and bottoms. However, once you find yourself on the right side of a longer term swing you can pull in significant profits all at once.
However, keep in mind, you are at risk of a major movement against your trades. You must be willing to trust a significant top or bottom -- to the point that if it fails you could end up suffering a margin call. This isn't for the faint of heart. Of course, you could always create a small sub-account specifically for implementing this type of strategy when you think you do have a known top or bottom.
Fundamental Conjecture
Something to keep in mind when you consider where the currency markets will be heading in 2009.
It appears that the Obama stimulus package will contain a $250,000 write off for business expenses. This is huge. Smaller businesses, when generating expenses, are not generally spending their money outside of the US. Vehicles, machinery, tools, raw goods or whatever else is eligible for this tax change will quickly represent income to other domestic businesses.
This is big.
Additionally, it was just reported today that mortgages on primary residences will soon be allowed to be adjusted during bankruptcy. According to some pundits this is a very large win as it is actually supposed to be better for the banks -- compared to a foreclosure. Not to mention the fact that if this done, greatly reducing foreclosure events, the downward pressure on housing prices will be released.
This is also big.
Finally, though it sounds like an insignificant item, Obama mentioned the need to restore trust in the financial system. Perhaps you are not aware, but the only thing that allows people to trade and exchange money via markets is trust. If you don't trust that you'll get a fair trade, receive ownership, or be protected to some degree from swindles and excess, then why in the heck would you put your money at risk?
This is perhaps the biggest item. However, don't be surprised if this item turns into political fodder as ideologues argue against it. What these ideologues often forget is that free markets simply require a level and trusted playing field. Rules are fine -- as long as they're enforced reliably for all players.
Don't forget that!
It appears that the Obama stimulus package will contain a $250,000 write off for business expenses. This is huge. Smaller businesses, when generating expenses, are not generally spending their money outside of the US. Vehicles, machinery, tools, raw goods or whatever else is eligible for this tax change will quickly represent income to other domestic businesses.
This is big.
Additionally, it was just reported today that mortgages on primary residences will soon be allowed to be adjusted during bankruptcy. According to some pundits this is a very large win as it is actually supposed to be better for the banks -- compared to a foreclosure. Not to mention the fact that if this done, greatly reducing foreclosure events, the downward pressure on housing prices will be released.
This is also big.
Finally, though it sounds like an insignificant item, Obama mentioned the need to restore trust in the financial system. Perhaps you are not aware, but the only thing that allows people to trade and exchange money via markets is trust. If you don't trust that you'll get a fair trade, receive ownership, or be protected to some degree from swindles and excess, then why in the heck would you put your money at risk?
This is perhaps the biggest item. However, don't be surprised if this item turns into political fodder as ideologues argue against it. What these ideologues often forget is that free markets simply require a level and trusted playing field. Rules are fine -- as long as they're enforced reliably for all players.
Don't forget that!
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